Reading The SEC’s Tea Leaves: A Preview of Possible Staff Disclosure Comments

With an onslaught of Dodd-Frank activity looming, the third quarter earnings season officially underway and the year-end fast approaching, wouldn’t it be nice to have some indication of what the Securities and Exchange Commission will focus on when reviewing upcoming year-end filings?  Well there’s certainly no shortage of options, but the Commission’s Chief Accountant, Wayne Carnall, may have just given us a clue, at least with respect to financial disclosures.

As reported in, Carnall, in a recent accounting-industry speech, named several areas that are of particular interest to the Commission and likely to be the focus of future staff comment letters.* Among them, Carnall pointed to disclosure regarding short-term liquidity.  No surprises there; just last month the Commission proposed a new set of rule amendments that would require companies to provide greater quantitative and qualitative disclosure of short-term borrowing during a reporting period.

Carnall also indicated that the Commission will increase its focus on the credentials and experience of those preparing and auditing the financial statements of companies with operations in developing countries.  For example the Commission has recently issued comments such as:

We note that your operations are in [a developing county] but your audit report was signed by an audit firm based in [the United States]. In this regard, please describe for us how the U.S. auditor performed the audit of [your foreign] operations.  In your response, please tell us whether another foreign audit firm assisted in the audit. If so, please tell us the name of the other firm, whether the other firm is registered with the PCAOB, and the extent to which audit work was performed by the other firm.

Other named areas of Commission focus included disclosure regarding the calculation of contingent liabilities, non-cash charges involving impairment to goodwill and deferred tax assets, and the consistency and accuracy of non-GAAP disclosure.

What about non-financial disclosures?  Carnall didn’t touch on any, but Director Meredith Cross, in recent testimony before the House Committee on Financial Services, indicated:

Executive compensation disclosure review remains a focal point of the Division’s review program and the staff continues to comment on ways that companies can enhance their disclosure.


*Of course the Commission disclaims responsibility for the public statements of its employees, so Carnall’s predictions may not actually reflect future Commission policy.

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